Weathering the inflationary storm

The triple whammy of Brexit, the pandemic and now inflation is weighing heavily on budgets and balance sheets, both for organisations and individual pockets. 

I now pay more than £100 to fill my car with petrol when last year it was £70 – that’s a massive 43% rise. My domestic energy bills – and yours – are likely to go up by 54% following the increase in the price cap, and business costs are being hit even harder.  

With the Bank of England raising interest rates and the likelihood of a recession to come, I’m not confident how much I’ll have left at the end of the month, so I have to make careful spending choices. 

I’m far from alone: the GfK consumer confidence tracker shows confidence hit its lowest ever score last month.

What history tells us

You could argue – and I certainly would – that the arts are exactly what people need as an antidote to hard times. But the kind of arts people are willing to pay for is shifting. Encouragingly, hospitality and leisure are bucking the economic trend, though they are still very much in pandemic recovery mode. 

In the global recession of 2007-2009, theatre generally performed well. This could give the wider arts sector grounds for hope, but the circumstances were very different then. For one, that recession was not coupled with high inflation.

Again looking at theatre, a survey conducted during that recession revealed that 41% of respondents intended to programme more “popular” work, and 37% intended to reduce the amount of “challenging” work they commissioned. While it’s tempting to hope that fortune favours the bold, certainly there’s an argument that now is a time to scale back risk when people are being extra cautious in their spending. 

Responding to inflation

There are broadly four options for responding to inflation:
•    Doing nothing, running down reserves or reducing in scale as a result
•    Shifting inputs and costs to areas less affected by inflation (eg designs that favour projection over plywood, reducing the number of trucks needed to tour a show)
•    Prioritising high profit margin offerings
•    Adjusting prices 

I’m going to focus on the most pressing of these options for most organisations – the seemingly binary choice of whether to put admission prices up or down. 

Increasing prices

Many organisations are increasing prices in response to inflation. The bigger the market and the lower the supply, the more scope there is for pushing prices up – that’s basic supply and demand economics.  

Whether dynamic pricing is right for your organisation depends on your objectives. But be clear, it’s a commercial approach that deliberately prices people out of the market and only works when demand is strong. 

Any increase in price comes with risk. Let’s say you sell tickets at an average price of £30 and you sell 60% of capacity. Increasing the price by 10% to £33 increases income by 10%, but you’re likely to lose some volume (sales). As long as you don’t drop below 55% capacity, you’ll still make a net gain. But if you go below that, you’ll make less money from fewer people: a lose-lose scenario.

That’s not to say you can’t increase some of your prices.  Most organisations have a range of prices on offer through differentiation by day, by seat location (if you’re a theatre), by concession type, by sales channel etc. Make sure you understand your lower prices.  Why are they lower? Having low prices seats at the back of the auditorium doesn’t make you more accessible.  Who’s buying those tickets?  

Similarly, why do you have cheaper tickets on a particular afternoon? Seeming accessible and actually being accessible are not the same thing. Have a read of my previous article (…) on the messaging implications of your pricing.   

Reducing prices 

The other option (ignoring the do-nothing approach) is to reduce prices.  

If people have less to spend on tickets, does lowering prices make the decision to spend easier?  Probably not.  If you’re in cost-cutting mode, spending anything on non-essentials will often be out of the question. Our research into price elasticity shows that, contrary to the prevailing narrative and popular belief, lower prices do not drive new sales in the volume required to make up for loss of income.  

Let’s do the maths again. If you reduce the £30 price by 10% to £27, you now have to sell at least 67% of capacity to make up for the drop in price. The risk is that you attract the same people, they just pay less so your income is down 10%. If you are tempted to lower prices despite this, think about thresholds.  There are such things as magic numbers in the world of pricing.  Time and again we see more substantial changes in demand at key price points – £10, £20, £50 etc. 

Psychologically £49 is a lot more attractive than £50 – there’s much less of a difference between £48 and £49. While £50 communicates quality and confidence as you’re pricing right on the threshold, £49 may give you the benefit of appearing to be cheaper without risking a big drop in income. 

Ultimately, pricing should be straightforward; it should be easy to understand why you’re paying a particular price. So, look at all the prices you offer and start asking why.  If you can’t come up with a good reason for a difference in price, why do you offer it? Streamline, simplify and be clear. 

Evaluate and iterate

However you adapt your pricing to the current financial climate, make sure you evaluate the impact.  What are your measures of success?  Income or volume?  What’s the minimum level those metrics need to stay above to claim that any change is having a positive impact? 

The two most useful measures are average income (including non-ticket income) either in daily form or per performance, and volume of tickets sold – again daily or per performance.  As long as you’re maintaining these then your change isn’t costing you anything. But if the change is working then you should see an increase in either one or the other, ideally both.  

David Reece
David Reece

Deputy CEO David Reece has led our team of consultants and analysts for more than a decade, working with cultural organisations and attractions globally

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